Traders Watch Sandy's Impact and Ding! 'Fiscal Cliff,' Round 1

The early economic impact of Super Storm Sandy could start to show up in the coming week's data, while investors remain riveted by Washington's new urgency to fix the "fiscal cliff."

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There are retail sales data for October Wednesday and a number of major retailers' earnings, including Wal-Mart and Home Depot, which could show some storm impact at their east coast stores. Traders are also watching Europe, where the Eurogroup finance ministers meets Monday, amid anxiety over Greece.

The week will start off slowly, with bond markets closed for Veteran's Day Monday.

Congress returns Tuesday, and President Barack Obama holds meetings with Congressional leaders at the White House during the week, in an effort to find common ground on the fiscal cliff. The cliff is the slam the economy would feel from the $607 billion tax increases and spending cuts that start Jan. 1. Congress put off working on the fiscal issues until it was clear who would win the White House and what the makeup of Congress would be since each party has a different view on revenues and spending. (Read more: Fiscal Cliff: Complete Coverage)

"We're going to have a lot of uncertainty about this, whether they're going to push out the cliff or come together quickly and talk about some type of longer term scheme that looks like it's dealing with the debt and deficits," said Stuart Freeman, chief U.S. equity strategist with Wells Fargo Advisors. "If that happened, of course the market would love that. But I'd assume we'll see some brinkmanship here. No one wants to crater first."

The Dow was down 2.1 percent for the week, to 12,815, but it lost 3.5 percent since Tuesday's election, which resulted in re-election of Obama and the status quo of a Republican-controlled House and Democrat-controlled Senate. Stocks sold off on several factors, but a big one was the concern that a gridlocked Congress will not be able to find compromise in time. The S&P 500 fell 2.4 percent for the week to 1379, but was down 3.5 percent since Tuesday. (Read more: 'Cliff' Fears Give Stocks Worst Week Since June)

"I think we're just going to bounce around here. We're kind of sitting at the 200-day moving average (on the S&P), and I think this market, while we're waiting and watching, is going to be kind of nervous," Freeman said. "…even though the fundamentals are still improving on the housing numbers, which are slowly getting better. The confidence of consumers rose again today, and it's been pretty consistent."

Consumers are beginning to borrow more and spend more. "No matter who won, we thought the cycle was going to accelerate a little bit this year," said Freeman. Consumer sentiment on Friday was at a five-year high.

The retail-sales report for October, however, is expected to show a decline of 0.2 percent after September's 1.1-percent gain. Deutsche Bank chief U.S. economist Joseph LaVorgna said Wednesday's retail-sales report and industrial production on Friday could show some impacts from Sandy, but the storm made landfall on the third to last day of the month, so the impairment should be relatively small. He said some spending gets a boost but discretionary spending categories typically decline and there's usually a slowdown after the storm. (Read more: Retail's New Grinch: A Sandy-Snarled Supply Chain)

November regional Fed surveys, including the New York Empire State survey and the Philadelphia Fed survey Thursday should give some feedback on storm impact, he said in a note.

LaVorgna expects the drag from Super Storm Sandy to be 0.5 percent on fourth-quarter GDP.

"We estimate that about a third of the economic activity in the region was shuttered during the storm. This means that during the week of the storm, the affected region accounted for about 15 percent of national economic output instead of 22 percent, thereby resulting in a short-term drop in national economic activity," he wrote.

Greg Peters, Morgan Stanley head of cross-asset strategy, said the data for the time being are going to be muddied by Sandy. "Hurricane Sandy gives us a free pass on the data front," said Peters. "The fourth quarter is going to be weak. The fact that Sandy kind of taints those numbers is somewhat of a perverse positive."

Peters said he has become constructive on U.S. stocks. He believes the fiscal cliff will be addressed, at least before the debt ceiling needs to be raised in February. He also thinks European leaders will make further moves to stop the crisis.

"From now, I think it will press higher," said Peters of the stock market. "There's been a re-pricing, not massive but decent. I think there's real upside here. What I'm suggesting, which is counter to what most people think is the January effect will be earlier this year. It will be around Thanksgiving when this thing start to kick in at once. It could all go horribly wrong if politics (messes) this up. I think you're getting a truer kind of leadership and government here than you did during the campaign."

In the week ahead, traders will be watching Greece, expected to issue short-term debt to meet a 4 billion euro redemption. Its aid package is not expected to be acted on at the Eurogroup meeting Monday, analysts said. (Read more: Greece Says Cash Reserves Almost Depleted)

"Europe is the central story in the FX market," said Boris Schlossberg, managing director with BK Asset Management.

"The worry is the core is starting to melt and the slowdown in the core economies could push the whole region into recession. That's why you're seeing the euro so weak," he said. "They haven't come up with a solution that satisfies the market."

Schlossberg said the market continues to worry about Spain, and that it will wait too long to ask for aid. "It's the same story that keeps coming back, but every time it keeps coming back it's worse," he said.